DRI Stock Study (5-16-24)

I recently did a stock study on Darden Restaurants Inc. (DRI) with a closing price of $151.78.

M* writes:

     > Darden Restaurants is the largest restaurant operator in the U.S.
     > full-service space, with consolidated revenue of $10.5 billion in
     > fiscal 2023 resulting in 3%-4% full-service market share (per NRA data
     > and our calculations). The company maintains a portfolio of 10 restaurant
     > brands: Olive Garden, LongHorn Steakhouse, Cheddar’s Scratch Kitchen,
     > Ruth’s Chris, Yard House, The Capital Grille, Seasons 52, Eddie V’s,
     > Bahama Breeze, and The Capital Burger. Darden generates revenue almost
     > exclusively from company-owned restaurants, though a small network of
     > franchised restaurants and consumer-packaged goods sales through the
     > traditional grocery channel contribute modestly. As of the end of its
     > fiscal 2023, the company operated 1,914 restaurants in the U.S.

Over the last 10 years excluding 2019 (actually 2020 for COVID-19; FY ends May 31 and I must increment any BI-referenced year by one), this large-size company has grown sales and earnings at annualized rates of 4.7% and 20.5%, respectively. Lines are mostly up, straight, and parallel except for sales/EPS decline in ’21.

Over the past decade, PTPM trails peer and industry averages despite increasing from 2.8% (’14) to 10.7% (’23) with a last-5-year mean (’20 excluded for entire paragraph) of 9.8%. ROE leads peer and industry averages while increasing from 8.6% (’14) to 47.4% (’23) with a last-5-year mean of 35.6%. Debt-to-Capital is lower than peer and industry averages despite ranging from 18.4% in ’16 to 69.0% in ’22 with a last-5-year mean of 57.6%.

Quick Ratio is low at 0.14 but Interest Coverage (per Value Line) is 11.7. M* gives a “Standard” rating for Capital Allocation and Value Line gives a B+ rating for Financial Strength. M* assigns a “Narrow” economic moat to the company.

With regard to sales growth:

• YF projects YOY 8.8% and 4.8% for ’24 and ’25, respectively (based on 25 analysts).
• Zacks projects YOY 9.0% and 4.9% for ’24 and ’25, respectively (12 analysts).
• Value Line projects 4.4% per year for ’23-’28.
• CFRA projects 8.6% YOY and 7.1% per year for ’24 and ’23-’25, respectively.
• M* gives a 2-year annualized ACE of 6.9%.

I am forecasting below the range at 4.0% per year.

With regard to EPS growth:

• MarketWatch projects 10.4% and 10.0% per year for ’23-’25 and ’23-’26, respectively (based on 30 analysts).
• Nasdaq.com projects 8.9% and 8.5% per year for ’24-’26 and ’24-’27, respectively [14/7/1 analyst(s) for ’24/’26/’27].
• Seeking Alpha projects 4-year annualized growth of 10.2%.
• YF projects YOY 10.8% and 8.6% for ’24 and ’25, respectively (27), along with 5-year annualized growth of 10.1%.
• Zacks projects YOY 10.6% and 8.1% for ’24 and ’25, respectively (14), along with 5-year annualized growth of 10.3%.
• Value Line projects 11.3% per year from ’23-’28.
• CFRA projects 11.1% YOY and 10.0% per year for ’24 and ’23-’25, respectively.
• M* provides long-term ACE of 9.6%/year and projects 7.0% through 2033 in its analyst report (I will use the latter).

My 7.0% forecast is at the bottom of the long-term-estimate range (mean of five: 9.8%). I will use ’23 EPS of $8.00/share as initial value rather than 2024 Q3 EPS of $8.54 (annualized).

My Forecast High P/E is 20.0. Over the past decade (excluding ’20), high P/E falls from 35.8 (’14) to 20.5 (’23) with a last-5-year mean of 23.9 and a last-5-year-mean average P/E of 19.3. I am below the 10-year range.

My Forecast Low P/E is 14.0. Over the past decade (excluding ’20), low P/E falls from 29.1 (’14) to 13.9 (’23) with a last-5-year mean of 14.6. I am forecasting near the bottom of the range (only ’23 is lower).

My Low Stock Price Forecast (LSPF) of $112.00 is default based on $8.00/share initial value and near the 2022 low price: 26.2% less than previous close and 16.0% less than 52-week low.

The lowest Payout Ratio (PR) over the past decade is 32.3% in ’21 and the last-5-year mean is 51.2%. I am forecasting below the range at 32.0%.

These inputs land DRI in the HOLD zone with a U/D ratio of 1.8. Total Annualized Return (TAR) is 9.7%.

PAR (using Forecast Average—not High—P/E) is less than I seek for a large-size company at 6.6%. If a healthy margin of safety (MOS) anchors this study, then I can proceed based on TAR instead.

To assess MOS, I compare my inputs with those of Member Sentiment (MS). Based on only 10 studies done in the past 90 days (my study and 4 other outliers excluded), averages (lower of mean/median) for projected sales growth, projected EPS growth, Forecast High P/E, Forecast Low P/E, and PR are 6.0%, 9.6%, 21.7, 14.5, and 51.2%, respectively. I am lower across the board. Value Line projects a future average annual P/E of 18.0 that is lower than MS (18.1) and higher than mine (17.0).

MS high / low EPS are $13.44 / $8.44 versus my $11.22 / $8.00 (per share). My high EPS is less due to a lower growth rate and initial value. Value Line’s high EPS of $13.65 is greater than both.

MS LSPF of $116.50 implies a Forecast Low P/E of 13.8 versus the above-stated 14.5. MS LSPF is 4.8% less than the default $8.44/share * 14.5 = $122.38, which results in more conservative zoning. MS LSPF is 4.0% greater than mine, however.

TAR (over 15.0% preferred) is less than MS 15.3%. Despite the small MS sample size, I try to underestimate every input relative to analyst estimates and/or historical data. I believe MOS to be robust in the current study.

With regard to valuation, PEG is 1.7 and 2.4 per Zacks and my projected P/E: somewhat overvalued. Relative Value [(current P/E) / 5-year-mean average P/E] is fairly valued at 0.92.

DRI is a BUY under $140/share. With a forecast high price ~$224, my personal TAR criterion would be met ~$112 (plus a few bucks, perhaps, as forecasting PR at bottom of the range rather than at last-5-year mean lowers TAR by 1.0%).